Bankers alert to the jobless trend

ICAP Australia, the local arm of the giant global inter-dealer broker, this week added an agriculture and soft commodities desk to its interest rate, foreign exchange and energy broking operations.

The three-man desk came from the collapsed MF Global – following four other MF Global brokers who joined in November.

ICAP’s business development manager Victor Gugger says the broker is fielding more calls from job seekers – even whole desks. And investment bankers.

“It started in the latter part of last year but it’s growing and I expect the interest to really pick up in the next few months," he says.

“A lot of the interest is from [investment] bankers," Gugger says. “In the past they wouldn’t have considered broking but it’s an opportunity."

Whether or not they consider broking a status demotion, the harsh reality is that unemployment looms more ominously in investment banking than in commercial banking.

As the new wave of retrenchments in financial services gathers pace, it contrasts the different business models. Investment banking has fewer, more highly paid individuals and is very difficult to outsource. But those staff have a direct relationship with revenue generation – less revenue, less remuneration, less staff.

Commercial banks have more, less highly paid staff but their jobs are more amenable to outsourcing and automation.

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For example, in a slide with
Commonwealth Bank
’s last interim profit, chief financial officer David Craig showed the bank had cut the full-time equivalent (FTE) personnel in mortgage processing from 1600 to 955 over five years with streamlined processes, new technology and changed business practices. Home loans processed, meanwhile, have climbed to 1400 per FTE from under 1000 in two years.

But you can’t offshore to a processing centre in India or the Philippines the guy ringing Marius Kloppers to pitch a deal. The job outlook in neither realm of banking is rosy, however, despite the truth in Assistant Treasurer Bill Shorten’s claim that financial services jobs will grow in coming years. They will – but in different businesses. Just as the ICAP experience shows.

The restructuring of financial services echoes the shift to resource industry jobs and away from low value-add manufacturing and old school retailing.

Unlike the resources industry, however, overcapacity in financial services was built to exploit a bubble now busted. While excess capacity in resources which has undermined productivity will hopefully be used up as the boom develops, the opposite is true for financial services.

Productivity expert
Saul Eslake
from Bank of America Merrill Lynch notes “labour productivity growth in finance and insurance has slowed considerably over the past decade, and by more than the economy as a whole".

In part this reflects the familiar pattern of hard decisions being deferred in good times but while productivity in the finance sector still exceeds the general economy, the “margin" is declining.

“Over the last three years – as short a period as I would want to use but it does roughly cover the post-GFC period – labour productivity in finance and insurance has grown at an average annual rate of only 0.8 per cent, below that for the ‘market sector’ as a whole of 1.0 per cent per annum," Eslake says. Which is less than manufacturing at 0.9 per cent, where the tough times hit earlier.

While the impetus for these latest industry-wide job cuts is cost reduction, underpinning that is a desire to improve productivity as that is what drives earnings in the absence of easy revenue growth.

These are global trends, even more intense in markets where credit growth has collapsed and banks are losing money.

For example, global banking intelligence group Celent listed among its major trends for the year “the drive to reduce costs and the reality of the huge growth in mobile and smartphone usage driving banks to think even more about digital channels".

This shift doesn’t just offshore or outsource jobs, it eliminates them. Which is not to say jobs won’t also be shifted.

“Outsourcing means more than just business processes," said Celent. “It can mean shared systems in a service bureau, software as a service, internal or external clouds. It can also mean new business models in existing spaces, or using off-the-shelf software instead of internally developed systems. Banks are more willing to use other parties to solve their technology and operational challenges."

This is Westpac Banking Corp’s “best sourcing" program.

In a US report relevant here, McKinsey & Co says revenue and costs will fundamentally change business models. “By business model, we mean how banks actually operate – how work is done, the degree of automation, the pricing and design of products, and underlying systems of compensation," the firm said.

This is precisely the emphasis of ANZ’s latest redundancies.

“In the market’s view," McKinsey says, “the threats are so strong that it won’t be enough to trim the sails, refocus investment, or cut costs a bit here and there. Our estimates show that if banks maintain their existing business models, their average return on equity would fall to 7 per cent by 2015 from its current level of 11 per cent against a cost of equity projected to be more than 9 per cent."